Anum Yoon recently joined the blogging bandwagon to write about money management, frugal advice, and financial trends. She started and maintains her personal finance blog, Current on Currency.
Tax season is pretty much over now that April 15th is just around the corner. While many have already received their tax returns, there are others who are still waiting. For those of you that are still sitting tight, you’re probably hankering for that glorious check so that you can indulge in a big purchase, pay off debt, or pay outstanding bills.
Until 2013, the most popular method for getting your refund quickly was the Refund Anticipation Loan. The Refund Anticipation Loan (RAL) is a loan taken against the taxpayer’s anticipated tax refund. This loan usually lasts for 7-14 days before the IRS actually issues the refund check.
Although RALs allow you to get your cash a little bit earlier than waiting for a check from the IRS, they are both costly and inherently risky. Loan fees typically range from $30 to $130 and sometimes additional fees are added on top of that. If you expected a refund of around a few thousand dollars, you can see a significant chunk of change deducted from your refund as fees. Are all these additional costs worth getting your refund a mere week or two faster than waiting for the IRS?
In addition to these fees and costs, there is also risk involved with taking out a RAL. This loan must be repaid even if the IRS denies or delays your refund, or even if your refund is smaller than you anticipated. This can mean costly interest payments if you do not repay the loan and it will end up negatively affecting your credit score or your account being sent to a debt collector.
Be Careful
Many tax time advertisements for “Fast Cash Refunds,” “Money Now,” or “Instant Refunds” are actually Refund Anticipation Loans. These ads are targeted towards people who need money in a pinch and believe they cannot wait the extra week or two for their refund to come in. The fees involved and the risks of not getting enough money for your refund are too high to justify getting your money a little earlier.
There are ways to get your money as quickly as possible without taking out a Refund Anticipation Loan. Avoid the temptation of taking less money now instead of more money later.
Instead of putting yourself in a financial blunder, you can avoid the entire dilemma in the first place by following these five steps:
1. File Early
While this won’t help you now, it is something to keep in mind for next year. Filing your taxes earlier will not only improve your chances of getting a quick refund, but you will also be able to track the status of your tax refund if you do it online. You’ll be thanking your impatient self next year when you won’t have to wait until April.
2. Borrow the Money from a Friend or Family Member
One of the reasons you shouldn’t borrow against your tax refund is because you may not get as much as you anticipate. Since loans against tax refunds usually come with high interest rates, you end up further in debt. Borrowing money from a friend or family member saves you from that because you will probably not have to deal with interest and if you don’t get as much as you planned from the IRS, you’ll have longer to pay the loan back without penalties.
3. File Online and Check the Status
If you haven’t filed yet, consider doing it online. Taxes filed online are often processed faster. You can also check the status of your check. While you may check it multiple times a day as you eagerly await its arrival, it’s better than taking out a loan against it.
4. Choose the Direct Deposit Option
Just as filing online speeds up the process, so does choosing the direct deposit method. This is mostly because you don’t have to wait on the postal service for your check.
5. Decrease the Tax Return Amount
If you have a really hard time not borrowing against the refund, you may want to consider cutting down your refund check next year. You can do this by paying less to the IRS throughout the year. This does make tax season less enjoyable if you get money back, but it helps you battle the urge to borrow against it.
Patience is a virtue. While you’re excited about having some extra money to play with, try to tell yourself that even though waiting a few more weeks might hurt a little now, borrowing against your refund will hurt a lot more later.
How about you all? Do you have any experiences with RALs? Do you have other ideas or tips on how to not borrow against your tax refund?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/carbonnyc/2204277278
5 Ways to Avoid Borrowing Against Your Tax Refund is a post from: My Personal Finance Journey